June 17 (Bloomberg) -- Prime Minister George Papandreou
promised a year ago that he would “change” debt-stricken
Greece. “We’ll be back here at the edge of the precipice again
some years down the road” otherwise, he said in an interview.

Today, Greece is again at the edge of the precipice -- and
so is Papandreou, who is hanging onto his job by his fingertips.
Should they tumble, much of Europe may feel the impact.

Papandreou has to keep his Pasok party’s shrinking
parliamentary majority in line to pass 78 billion euros ($110
billion) in austerity measures required for Greece to get a
second bailout from the European Union. EU reluctance to lend
until the conditions are met has roiled markets from Amsterdam
to Athens.

“His political authority inside Pasok and on the domestic
stage has been severely, possibly irreversibly, damaged,” Jens
Bastian, a visiting economist at Oxford University, in England,
said in an e-mail. “He will not resign, but try to soldier on
as long as he is convinced that his reform efforts are worth it
and he can command the support of his MPs.”

A Greek default would weaken the balance sheets of such
banks as BNP Paribas SA and Dexia SA, hobble the ability of
Greek institutions to tap the European Central Bank for
emergency funds and weaken the fabric of the 53-year-old EU and
its 12-year-old single currency. Three years of recession and
probable further austerity may already have damaged Papandreou.

Emergency Meeting

The prime minister, who celebrated his 59th birthday
yesterday, today named Evangelos Venizelos, the defense minister,
to the post of finance minister as part of a cabinet reshuffle.
He replaces George Papaconstantinou. The move came after weeks
of public protests against austerity measures that brought tens
of thousands of Greeks into the streets.

The yield on Greece’s 2-year bond topped 30 percent for the
first time yesterday after two members of his parliamentary
group resigned. The cost of insuring Greek debt rose to an all-time high.

Since Papandreou took power in October 2009, the Athens
Stock Exchange General Index has fallen 41 percent, versus a 20
percent rise in the Stoxx Europe 600 Index. Greek stocks are the
world’s sixth-worst performers in the past 12 months.

The son and grandson of Greek prime ministers, Minnesota-born Papandreou grew up in part outside his home country. He
lived in Sweden, Canada and the U.S. as well as Greece after the
military took power in 1967 and exiled his father, Andreas
Papandreou. The younger Papandreou graduated from Amherst
College and has a master’s degree in sociology from the London
School of Economics.

Foreign Minister

After his victory, he initially assumed the foreign-minister portfolio as well, a job he had held under a previous
Socialist government. The economy became a priority when
Papandreou discovered within weeks of taking office that
successive governments had been cooking the books on the
country’s finances.

He was eventually forced to acknowledge that the country’s
2009 budget deficit had reached 15.4 percent of gross domestic
product, about three times what the outgoing New Democracy
government had claimed.

The prime minister was able to reduce that to 10.5 percent
last year; the latest budget and tax measures are intended to
get it to 7.5 percent of GDP by next year. Papandreou had to
enact wage and pension cuts for 768,000 state workers and
eliminate their bonuses, raise taxes on alcohol, tobacco and
food and agree to sell stakes in Greek telephone, gambling and
power companies.

‘Long Way’

“They have carried a huge burden of responsibility, pretty
much also a burden of the past, and we have come a long way,”
EU Economic and Monetary Affairs Commissioner Olli Rehn said in
a Bloomberg Television interview in Brussels yesterday. “They
have made significant progress in fiscal consolidation, which
tends to be forgotten in the current turmoil.” He added that
“further steps” are needed.

Rehn helped craft the initial rescue package for Greece in
May 2010 of 110 billion euros, of which 80 billion euros were
from euro-area governments and 30 billion euros from the
International Monetary Fund. The rescue foresaw Greece’s return
to bond markets in 2012, a goal now being abandoned in favor of
a second aid package.

“We are on a difficult course, on a new Odyssey for
Greece,” Papandreou said on the island of Kastelorizo on April
23, 2010, when the first bailout was triggered. “But we know
the road to Ithaca and have charted the waters. We have ahead a
journey with demands on all of us, but with a new collective
conscience and common effort we will make it there safe, more
sure, just and proud.”

Higher Wages

It was a turnaround from his campaign message, when he
promised Greek voters higher wages and pensions and heavier
taxes on the wealthy. As recently as Sept. 12, 2010, Papandreou
was telling Greeks that he would “restore, and increase,
pensions and wages” once the other elements of the economic
package were in place and fiscal conditions had stabilized.

His office did not respond last week to an interview
request.

After more than a year of austerity, Greece’s budget
deficit is still greater than three times the EU limit. The
country’s debt will reach 166 percent of GDP next year without
policy changes, the European Commission said on May 13.

The deficit this year will be 9.5 percent of GDP without
further austerity, wider than a 7.4 percent target set under the
European-IMF rescue last year, the commission, the EU’s
executive arm in Brussels, forecast last month. An EU-IMF review
painted a picture of flagging Greek government resolve as the
economy passes through its third year of recession.

At a Standstill

“After a strong start in the summer 2010, reform
implementation came to a standstill in recent quarters,” the
commission, the ECB and the IMF said in a joint report earlier
this month. “A reinvigoration is necessary to prevent the
fiscal deficit from getting entrenched at unsustainable levels,
but also to reach a critical mass of structural reforms.”

Papandreou may have been reluctant to dismantle the social
system built in part by his father, the founder of Greece’s
Socialist Pasok party, when he was prime minister in the 1980s.

“In the early phase of his government, he wasn’t quick
enough,” said Janis Emmanouilidis, a senior analyst at the
European Policy Centre in Brussels, said in a phone interview.
“And over recent months, the reform effort has become slower.”

At the same time, the premier’s reluctance to level with
the Greek public has reduced willingness for sacrifice, he said:
“There is a high degree of frustration and anger; people see
the future of their kids and grandkids at risk.”

“Papandreou will have great difficulties surviving,”
Stefanos Manos, economy minister from 1992 to 1993 in a
government led by the current main opposition New Democracy
party, said in a phone interview. “There has been too much talk
and not enough action on real reform. The only thing he has done
is constantly raise taxes to pay for new spending. That has been
his demise.” Manos now has his own political party.